This May be the Only Sure Way to Play Real Estate

I’ve always been a sucker for the home improvement shows on HGTV.

That’s why I planned to sit in front of the TV for just a few minutes while folding laundry over the weekend, but it wasn’t until an hour later that I got moving again. One of my favorites — Holmes on Homes — was on.

If you like these shows as much as I do, you might have noticed some telling changes in the lineup over the past few years.

A few years ago, shows like Flip That House and Property Ladder were in heavy rotation. During the home real estate boom, they featured people who bought, remodeled, and quickly resold homes for near six-figure gains.

But as the housing market went from boom to bust, a different kind of real estate show emerged. Designed to Sell, Get it Sold, Real Estate Intervention and The Unsellables featured desperate home owners, struggling to sell in a buyer’s market.

Now there is a new trend in the real estate television market that’s plenty telling. Shows like For Rent and Income Property feature storylines that play into the growing demand for apartment rentals.

The statistics behind the real estate television trend
No matter what trends you examine, the conclusion is the same. There just aren’t as many people buying homes as there once were.

#-ad_banner-#In the first quarter of 2010, the amount of U.S. mortgage debt dropped by -$99 billion. In the second quarter, it dropped by another -$49 billion. In August 2010, the number of sales of existing homes was -19% below August of last year. The rate of new home sales was off -29% compared to August 2009.

But the decline in home buying is starting to trigger an increased demand for rental apartments. Apartment occupancy rates rose to 92.2% in the second quarter of 2010, up from 92.0% in the first quarter according to Reis Inc. Rents are also starting to rise modestly, up +0.7% in the second quarter.

Could this short-term trend become a long-term shift?
Clearly the burst of the housing bubble and continued high unemployment rate are instrumental in the increase in apartment demand. Without clear evidence of a housing rebound, people continue to be reluctant to buy. After all, why buy today what you may be able to get cheaper tomorrow? And although the chances of a double-dip recession appear to be waning, the fragile employment market has made people far more cautious about making any large financial commitment.

But even stability in the housing and job markets may not stem the rising apartment tide.

For Baby Boomers, the myth of a constantly appreciating housing market was fueled by our parents’ home ownership experience. As the chart below shows, with data compiled by real estate guru Robert Shiller, home prices steadily rose in the decade following World War II, fueled by returning GIs and a booming mid-century economy. But until the boom in the 2000s, home prices were mostly stagnant, supported only by the rising demand of the Baby Boomers themselves.

We grew up with the perception that buying a home was a dependable and savvy investment. But in reality, from 1940 to 2004, housing prices only appreciated an average of +2% annually, according to data from the U.S. Census. And according to a recent report released by Ned Davis Research, that’s probably the best we can hope for in the foreseeable future — prices might not rise until unemployment drops to 6%.

Would we have made the same decision to leverage ourselves with 30 years of debt for an investment that, after inflation, was a break-even proposition?

As we learned from our parents’ experience, the next generation of potential home buyers will be colored by our experience. Roughly 20% of them see their parents with a home that is worth less than when they bought it — and not worth as much as the debt their parents owe.

In other words, I think this is a long-term shift in behavior.

Opportunities to profit from the renting generation
Reis Inc. is forecasting continued strength in the apartment sector throughout next year. The firm is tempering its outlook past that due to the number of new apartment projects coming online in 2012. But I am more optimistic about the apartment sector. I believe we are not looking at a temporary shift — but are looking at a trend that could span a generation.

That’s why I’ve been snooping around some apartment REITs in preparation for my next Stock of the Month issue.

Action to Take –> There are a number of real estate investment trusts (REITs) that specialize in apartment properties. Equity Residential (NYSE: EQR) and AvalonBay Communities (NYSE: AVB) are among the market leaders. Investors looking for a slightly more diversified REIT play may prefer the iShares FTSE NAREIT Residential Plus Capped Index ETF (NYSE: REZ). Roughly 47% of the ETF is represented by apartment holdings, with healthcare properties making up the next biggest slice at 37%.

I’m not ready to pull the trigger yet, and one of these ideas may or may not make it into my real-money portfolio. But if you’re looking for a long-term trend that also throws off solid income, I think apartment REITs are looking appetizing, given the trend.

P.S. — I’m pretty picky about what makes into my portfolio. That’s why I’m still researching apartment REITs. So far this pickiness has paid off pretty well. My average closed trade for Stock of the Month is up +31.1%. To see the details (and learn more about my newsletter) click this link.